INN investigation: Pension spiking still prevalent despite massive debt

INN investigation: Pension spiking still prevalent despite massive debt

·         By Brett Rowland | Illinois News NetworkTop of Form

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Illinois school districts continued to pad pensions for retiring educators amid a two-year budget impasse and despite concerns about the state's growing pension debts, highlighting the persistence of a problem that lawmakers have struggled to contain.

As the state's budget stalemate entered a second year in the summer of 2017, some school administrators raised concerns about being able to to keep the doors open for the upcoming school year. Some talked about laying off teachers, cutting after-school activities or draining swimming pools. Others worried about depleting reserve funds. But through it all, the state's locally controlled public schools paid millions of dollars in penalties each year directly to the state's largest pension fund as a consequence of giving out raises and sick time in excess of the threshold set by a 2005 state law designed to discourage what is commonly known as pension spiking, an Illinois News Network investigation found.

“It’s inexcusable that school districts were spiking pensions at the end of their careers to the point where they’ve got to pay penalties,” said state Rep. Peter Breen, a Lombard Republican. “This data is Exhibit A for what’s wrong with Illinois’ pension systems."

The 2005 law penalized the practice of doling out hefty end-of-career raises to retiring educators, who would then get larger taxpayer-funded pension checks from the state. The law said that school districts would have to pay the cost difference for salary increases of more than 6 percent a year, essentially shifting the cost back to the local school district taxpayers. School boards could still give out raises of more than 6 percent in the years before retirement, but their taxpayers had to pay for the additional pension costs. The law requires local taxpayers to pay the state's Teachers' Retirement System for the full actuarial value that the system expected to incur from the higher salary.

Big end-of-career spikes can significantly boost the annual pension payments an educator receives in retirement and the total amount the taxpayer-supported pension system has to pay out over the term of the benefit.

At one point, 20 percent annual raises were common for educators preparing to retire.

Since the law was passed, school districts have had to pay more than $50 million in penalties to TRS, including $23.8 million since fiscal 2014. Districts used exemptions to avoid paying tens of millions more into the taxpayer-subsidized pension system.

Illinois faces a growing pension problem. It has the worst-funded public sector pensions in the country. Illinois' five pension systems have combined unfunded liability of more than $130 billion, although Moody's Investors Service places the total debt at more than $200 billion. TRS alone had an unfunded liability of $73.4 billion at the end of fiscal 2017, according to its website.

TRS manages pensions for educators across Illinois, with the exception of Chicago Public Schools. In recent years, the largest districts have often ended up paying the largest penalties to the pension system. But some districts pay far more than others.

Rockford School District 205, which has about 28,370 students, paid $1.1 million in excess salary and sick time pension penalties to TRS since fiscal 2014. Elgin-based School District U-46, with 39,377 students, paid $774,968.59 during the same period.

Rockford School District 205 Superintendent Ehren Jarrett and school board president Kenneth Scrivano did not respond to questions about the penalty payments. Rounding out the five highest penalties were Arlington Heights-based Township High School District 214 ($637,156.64), Waukegan Community Unit School District 60 ($631,835.42) and the Illinois State Board of Education ($592,619.69).

Statewide, more than a third of all school districts paid a TRS penalty in fiscal year 2018, Freedom of Information Act requests filed by INN revealed. Over the past five years, fewer districts have paid penalties each year, but the total amount of money TRS collected for excess costs has fluctuated.

Even as the state budget impasse stretched and school districts complained they weren't receiving enough state aid, 342 school districts paid about $3.3 million in penalties to TRS for end-of-career pension spiking.

While many of the payments for individual educators were small, others cost tens of thousands of dollars. For example, Rockford had to pay TRS $78,000 to cover the costs for end-of-career raises for Vikki Jacobson, a retired assistant superintendent of elementary education. The district paid for her pension penalty in 2016 during the state budget impasse. The average annual salary for a teacher in the district was $60,436 in 2017.

It wasn't just local school districts. Since fiscal year 2014, the Illinois State Board of Education itself cost taxpayers an additional $592,619.69 in penalties because of end-of-career raises that increased pension costs for retiring employees.

Excess cost payments to TRS have varied in recent years. The total amount in penalties in fiscal 2014 was about $4.86 million. In fiscal 2018, districts paid about $4.07 million.  

"The amount of excess salary grants are declining," said Dave Urbanek, director of communications for TRS. "School districts are more than aware of it. It's just a fact of life for them at this point."

Urbanek said the 2005 law did what it was designed to do. 

"The law definitely worked. You no longer – or very rarely – see double-digit increases," he said. 

Urbanek said the payments weren't penalties. The 2005 law makes no mention of penalties. Urbanek said that districts that give raises of more than 6 percent are not breaking the law. 

"The mistake is calling it a penalty. It's not a penalty. It triggers a cost," he said. 

However, many school districts consider the payments to be penalties and try to avoid them, said Ben Schwarm, deputy executive director of the Illinois Association of School Boards.

For example, Huntley District 158 has put a clause in recent teacher union contracts stipulating that no raises should be given above 6 percent in the final years before retirement and that any earnings above that limit would be forfeited.

Mark Altmayer, the chief financial officer and treasurer for the Huntley district, said the district made changes to monitor earnings and stay within the 6 percent limit.

"We look at this as a penalty," he said.

In June, Illinois lawmakers passed a new measure to try once again to curb pension spiking. The state budget enacted this summer for fiscal 2019 requires pension funds like TRS to bill local employers, such as a local school district, for salary increases of more than 3 percent – down from the 6 percent – for any year that will be used to calculate the employee's pension. Lawmakers estimated the change would save the state $21 million.

Despite the TRS pension fund's massive deficit, Illinois teacher unions filed a petition with 15,000 signatures asking lawmakers to get rid of the 3 percent cap shortly after the state budget was approved with bipartisan support in June.

"Because educators can qualify for the pension program after five years, the concern is that employers may want to limit any salary increases to 3 percent, which would deter people from furthering their education, and dissuade people from entering the profession, ultimately lowering the quality of education students receive," the Illinois Education Association wrote in a post on its website.

According to the latest Illinois Report Card, the average teacher salary in the state is $64,516 annually, among the highest in the country.

Even with the tighter cap, concerns remain that pension padding will continue to divert dollars away from the classroom.

State Rep. Mark Batinick, R-Plainfield, said the change might not accomplish much.

“There’s still end-of-career massive spiking that’s going on that’s stressing the pension systems and people are just writing checks,” Batinick said. “So obviously, where the abuse is is from the six percent and well beyond that. My guess is that if it was set to zero, we’d still have problems."